Strong corn competition from Russia, Ukraine

USDA projects Ukraine and Russia will eclipse both Argentina and Brazil as corn exporters by 2022/2032.

Russia, Ukraine and Kazakhstan are forming a Black Sea grain pool to establish common trading rules and implement a coordinated grain export policy.

Ukraine and Russia are taking steps toward planting genetically modified crops to close the yield gap.

Black Sea grain exports of corn and feed-wheat now have a major impact on U.S. corn exports to North African countries and the Middle East.

China is investing heavily in Ukrainian agricultural production, and there is discussion of improving railroad capacity between Russia and China, a move that could make Russian feed-wheat even more cost-competitive in China.

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Russia and Ukraine, long touted for their agricultural potential, are progressing on multiple fronts to become bigger competitors in world grain-export markets.

“Ukraine is going to be bigger than Argentina in corn, when you look at projections,” says Chad Hart, associate professor of economics at Iowa State University. “Call them a regional powerhouse in the Black Sea region,” he continues. “In wheat, when their production is good, they steal market share from everybody. Now they are looking to do the same in corn.”

The question is “when it will happen,” says Bryan Willey, an industry analyst with the Rabobank Food & Agribusiness Research (FAR) and Advisory Group.

Russia and Ukraine are beginning to close yield gaps on key commodities, Willey suggests, citing Russian wheat output. “In 2012, they had a larger output on just 75% of the acres seeded in 1990, though they still have a long way to go.”

Both countries have major hurdles to overcome. Willey notes the persistent fear of potential export restrictions, which has discouraged some investment, though restrictions are less likely now that Russia has joined the World Trade Organization.

The region’s farmers also need more mechanization and irrigation to become more competitive, and in Ukraine, a complex land-ownership structure creates challenges as agro-conglomerates try to manage thousands of smallholders’ land parcels.

Infrastructure is another challenge. “The challenge is getting the grain from the interior to export terminals infrastructure,” Willey says. “Grain can be ‘economically trapped’ where it costs more to get it to the port than its value. Ukraine and Russia have fairly good export infrastructure,” Wiley says.

A major limiting factor for the region’s corn farmers – the lack of top-quality genetics – may be easing; the Russian Federation will begin to allow the cultivation of genetically modified crops next summer. Meanwhile, Ukraine is taking steps to allow the production of genetically modified soybeans.

Despite these challenges, both countries are still becoming more competitive. “The Black Sea region is playing across the entire feed market,” says Hart. “We’re seeing a differentiation between Russia and Ukraine as to which crop they emphasize based on demand and weather.

“Ukraine has responded to the world tilt toward corn and is now a very strong competitor on the corn side. Russia is going back to the basics in wheat, where it has a comparative advantage in regional markets,” he continues.

“We didn’t used to worry about Black Sea wheat, but now it has a major impact on our export markets,” Hart says, citing 2012, when export corn markets like Egypt turned to Black Sea feed wheat.

Corn and feed wheat provide roughly equivalent nutritional value, although precise conversions vary based on the quality of the grain and specific livestock needs. In finishing swine, for example, corn and wheat offer the same levels of energy, but producers may have to adjust for wheat's higher crude protein and lysine levels.

Among the advances in Russian and Ukrainian agriculture:

Ukraine is negotiating with China on a $3 billion loan to resume irrigation in Ukraine’s South, a project that could begin by mid-2014 and supply water to 3 to 3.5 million acres to increase grain output.

Ukraine shipped its first-ever load of corn to China in early November, according to GPZKU, its state-run grain company. The 70,000 metric tons (2.8 million bushels) left the Black Sea port of Yuzhny in a panamax-sized vessel. A second shipment was scheduled to have left Nov. 30.

Chinese media report that China and Ukraine have a 50-year plan for China to use up to 7.4 million acres of Ukrainian farmland for grain and livestock production to feed China’s needs.

Western equipment makers are investing in Black Sea agriculture. For example, Agco will join with Russian Machines to manufacture and distribute farm equipment and replacement parts in Russia, an effort expected to improve Russian efficiency and farm income. Plans call for spending more than $100 million over three years to build a production facility and training center.

China and Russia are contemplating improved rail links through a “Silk Road” – a new rail line that could give Russian feed-wheat a more efficient route to China, where it competes with U.S. corn exports. At present, Russia’s feed-wheat exports ship from the Black Sea, through the Suez Canal and around India and Southeast Asia to reach China.

The USDA Foreign Agricultural Service estimates the grain handling capacity of Russia’s ports at 28 million metric tons, up 7 mmt from a 2011 estimate. That increase reflects the construction of a new terminal in Novorossiysk and increased capacity at terminals in Taman, and Kalininggrad. Facility management is also becoming more efficient, FAS reports.

A Louis Dreyfus Commodities-Brooklyn Kiev LLC joint venture will develop and manage a multi-commodity grain terminal in Odessa, Ukraine. When complete late in 2014, the terminal will have a storage capacity of 240,000 metric tons of grain and oilseeds for export.

“This will help us serve our global clients more efficiently and will also benefit the agricultural sector in Ukraine as a whole,” said Jean-Marc Foucher, CEO of Louis Dreyfus Commodities for Europe and the Black Sea. “The substantial growth in Ukrainian grain production and exports, which is expected to continue…requires efficient export channels.”

Russia, Ukraine, and Kazakhstan (a significant wheat producer) have agreed to establish a Black Sea grain pool that will work to establish standard trading rules and implement a coordinated grain-export policy.

Russian officials say the grain pool’s members expect to increase their grain production to 225-250 mmt and their export potential to more than 70 mmt (equivalent to 2.8 billion bushels of corn). Less than half the production is expected to be wheat.

Willey sums up the message for U.S. agriculture: “What happens to U.S. exports when a country like Ukraine finds it worthwhile to plant corn?”

What about soybeans?

Neither Russia nor Ukraine is currently a significant soybean producer, but improved transportation options between Black Sea producers and China could give the region’s exporters a significant cost advantage. The USDA’s Economic Research Service projects Ukraine’s soybean exports will increase 65% to almost 120 million bushels (mbu) by 2022/23. Corn exports from the former Soviet Union (primarily from Russia and Ukraine) are projected to climb 48% to 860 mbu bushels, eclipsing both Argentina and Brazil. (asking Edith by what date?)